A new lawsuit could change how Amazon does business with 3rd-party sellers forever

• Texas mom Morgan McMillan wants to sue Amazon over a defective Chinese product.
• But courts across the US have issued mixed rulings about whether Amazon is a "seller."
• The highest court in Texas could set a precedential ruling in a state of 29 million people.
• Are you an Amazon third-party seller with a story to share? Email acain@businessinsider.com.

Amazon's e-commerce empire relies on third-party sellers, but the company has long held that it is not responsible when products from these independent merchants turn up counterfeit, defective, or even dangerous. But a brewing lawsuit may change all that, and alter how Amazon and other e-commerce players do business forever.

In Amazon's most recent Prime Day - postponed to October 2020 due to the coronavirus - the significance of third-party sales shone through. Third-party sales for the event topped $3.5 billion, eclipsing the company's own retail business.

Meanwhile, third-party Amazon sellers are becoming a big business outside of the Seattle-based online giant, with private equity firms and other investors looking to buy up successful merchants for millions of dollars.

But an ongoing lawsuit could upend all that, and the ruling, in this case, could echo out to affect more companies than just Amazon. Walmart and other major players making a foray into third-party platforms could also be affected.

Plaintiff and Texas resident Morgan McMillan's nineteenth-month-old daughter swallowed a battery to a remote control purchased on Amazon, from a seller called "USA Shopping 7693." The baby was severely injured, but the Chinese-based seller or company couldn't be found.

McMillan sued Amazon in Texas, even though the company has argued that it isn't technically the merchant for the remote. Insider spoke with attorney and former Texas appellate justice John Browning, who has litigated product liability cases. He said that in the past, Amazon has tended to settle many cases before they get too far. Amazon declined to comment on the case.

"If I were a betting man, I'd probably give the edge to Amazon, but it's a very real possibility, given our case law, that the ruling could go the other way," Browning said. "There are huge implications."

Texas isn't the only state where Amazon has been sued over allegedly defective products sold on its website. In California, an appellate court ruled last August that a woman who was burned by a defective Chinese laptop battery sold through the "Fulfilled by Amazon" program could hold Amazon liable.

The case is currently set for trial in October, court records show. Jeremy Robinson of the law firm CaseyGerry, who represents plaintiff Angela Bolger in that case, said Amazon appears to have stopped allowing third-party sellers to do business under fake names after the decision came down, but he said it wasn't clear whether it was prompted by the lawsuit.

"There's basically a zero-percent chance of actually getting anything" from any defendants other than Amazon, said Robinson, who is also representing consumer advocacy groups in the Texas case. It could be very difficult to seize a shipment from a Chinese seller or to sue in Chinese courts, he added.

Legislators in California have proposed a new bill, AB 1182, that would clarify when electronic retailers can be held liable for defective products, although debate on the measure in its early stages. Amazon endorsed a similar proposal that passed the California senate in 2020, but other online retailers opposed it and that bill never became law.

Craig Crosby, who founded consumer advocacy group Counterfeit Report, told Insider that Amazon and other e-commerce players have long ignored the issue of counterfeit, pirated, and defective goods "through legal loopholes."

"Let's bring it down to just common sense. Do you really say, 'Anyone can sell anything on my website and I am not responsible for it'? Whereas a brick and mortar store is?" he said. "When you walk into a Walmart store and buy food, you have an expectation that that food is pure and healthy. When you buy it online - anything goes."

Are you an Amazon third-party seller with a story to share? Email acain@businessinsider.com.